Get Your Bond Protection in Place Now With FRA

by Sam Collins | December 6, 2013 1:58 am

Blackrock Floating Rate Income (FRA[1]) — This floating rate, closed-end fund is rated “3-star” by Morningstar with below-average risk and could provide a protective hedge for bondholders from a rise in interest rates. When the Federal Reserve decides to taper their bond purchases, this fund should benefit from both a rise in income and price, while straight bondholders will see the prices of their fixed-rate bonds fall. 

The fund seeks high current income and preservation of capital by investing at least 80% of its assets in leveraged floating-rate debt securities. Currently, the fund pays a monthly dividend of $0.906 for a 6.22%. 

Despite the continuation of monthly purchases of bonds by the Fed, interest rates on the 30-year bond have risen from about 3.7% to 3.91% in just two weeks, and the price of Treasury bonds has fallen. The rise in rates was caused by Fed officials who have recently been “testing the water” with statements pertaining to the unwinding of their purchases. This is meant to gauge the impact of raising rates on stock and bond markets and could be a warning that they are considering rolling back their bond-purchase plans as early as January. 

The fund has fallen in price this year because of the Fed’s easy-money policies. But since October, it appears to be forming a base in anticipation of higher interest rates. Long-term income investors could achieve high income and appreciation through the purchase of FRA at close to its 12-month low.

FRA Chart
Click to Enlarge

Chart Key[2]

P.S. – Traders looking to Serge Berger’s free “Beat the Bell[3]” service every morning will be putting themselves in capable hands.

Serge has worked for InvestorPlace for years now, and has filled in for me on the rare occasion I take a few days off. Every time I return, I see plenty of reader compliments about Serge’s work.

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I have no doubt that traders will be well-served by “Beat the Bell[3]” and Serge’s daily flow of ideas.

– Sam Collins, InvestorPlace Chief Technical Analyst

  1. FRA:
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